Graybar Electric Company, Inc.

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Graybar Electric Company, Inc.

34 Meramec Avenue
Clayton, Missouri 63105
U.S.A.
Telephone: (314) 512-9200
Fax: (314) 512-9453
Website: http://www.graybar.com

Private Company
Incorporated: 1926
Employees: 9,800
Sales: $4.8 billion (2001)
NAIC: 444190 Other Building Material Dealers

One of the largest employee-owned companies in the United States, Graybar Electric Company, Inc. is an international distributor of 1.4 million different electrical and telecommunications products from over 4,100 manufacturers. With its headquarters located in the St. Louis suburb of Clayton, Missouri, the Fortune 500 company maintains more than 250 distribution centers located throughout the United States, Canada, Mexico, and Puerto Rico, and is represented by authorized agents around the world. In recent years Graybar has made an effort to recast itself as a specialist in supply chain management services.

Roots Reaching Back to 1800s

Graybar was spun off by Western Electric Manufacturing Company in 1926, its name bearing homage to the two principal founders of Western Electric: Alisha Gray and Enos Barton. The one most instrumental in growing the business was Barton, who was born in upstate New York in 1842. By age 12 he was involved in the telegraph, a technology as revolutionary in its day as the Internet became in the 1990s. Numerous entrepreneurs and inventors, such as Thomas Edison, started out as telegraph operators; revered figures, they were called the “Knights of the Key.” Barton progressed from messenger boy to press-wire operator by the time of the Civil War, during which he was exempt from military service because of his valuable skill, instead working in New York City as part of the effort to transmit messages from the front to the newspapers. He then became the chief operator for the Western Union Company at the Rochester office following the war. Western Union, formed in 1856 when a number of smaller telegraph companies were consolidated, was known to stifle new competition by slashing prices, a tactic that was generally accompanied by a reduction in wages for its operators. When Western Union announced that it would cut salaries starting in January 1869, Barton began to investigate other lines of work while taking a course in bookkeeping. It was at this time that he met George Shawk, a Cleveland businessman who ran a manufacturing shop that was aligned with Western Union and also produced a variety of electrical devices. Shawk came to Rochester attempting to sell the city a fire-alarm system and sought out the assistance of a local who might help him make appropriate contacts. He met with Barton, whom he believed possessed the marketing skills he lacked, and soon offered to make him a half-partner in his business for $1,500. Barton visited the shop in Cleveland and quickly recognized that it held great promise, especially a prototype machine that was able to print a telegraph message as it was received. He met with its inventor, who was a fixture at the shop, which was constantly turning out models of his electrical inventions. His name was Elisha Gray.

Gray was born on an Ohio farm in 1835 and developed an early interest in electricity, but when his father died he was forced to leave public school early and earn a living as a carpenter. A professor at Oberlin College recognized his intelligence and encouraged him to resume his schooling at the age of 22. Gray completed his preparatory schooling, then continued on at Oberlin, where physics professor C.H. Churchill allowed him the use of his lab to conduct electrical experiments, which led to Gray making a living through inventions. Like many promising young inventors of the period, Gray found a patron in Western Union, which subsidized him in exchange for control over the patents he received and products that might result from them. His breakthrough came in 1867 with the development of a self-adjusting relay for the telegraph, drawing the notice of Anson Stager, the superintendent of the Cleveland-based Central Division of Western Union. Stager was another former telegraph operator who used his skill in Morse Code to rise to prominence. During the Civil War he made his mark as the chief of the military telegraphs for the Union Army, ultimately rising to the rank of General. It was Stager who encouraged Gray to conduct his work at Shawk’s Western Union shop, where he would be provided with all necessary supplies, machinists to turn out his models, and Western Union lines on which to experiment.

Gray and Barton Becoming Partners: 1869

Gray encouraged Barton to buy into Shawk’s business, which he insisted had the potential to become a major manufacturer of equipment for the telegraph industry. With only $200 in savings, Barton turned to his mother, who mortgaged the family farm to help him raise the necessary money. He then moved to Cleveland to take over the role as chief marketer for Shawk & Barton and became close friends with Gray, the two men living in the same boardinghouse. Barton recognized that Gray’s inventions were the key to the company’s future, a vision not shared by Shawk, who saw Gray’s reliance on the shop’s machinists as a distraction. Moreover, Shawk was easily discouraged whenever business fell off and within a matter of months was eager to sell out. Gray was more than willing to take his place and join forces with Barton, but he too lacked ready cash. Once again Stager intervened. He was paying a visit to the shop to keep tabs on how Gray was progressing on a private-line printer, which would be a major boon to companies sending messages within major cities. At the time, financial and commodity markets relied on messenger boys, a system that took far longer than communications between distant cities. Gray explained to Stager that his work was impeded by Shawk’s lack of support and confided that he had an opportunity to buy him out. Stager, against his lawyer’s advice, decided to back Gray, expressing great confidence in the character of both Gray and his partner, Barton. The company was promptly renamed Gray & Barton and moved its operations to Chicago at the behest of Stager, who had been convinced by Western Union to move there as well because Cleveland was now deemed too far east to serve as a central location in a country that was quickly becoming bicoastal.

Stager’s backing continued to be of great importance in Chicago. He endorsed a $500 note Barton and Gray offered to take over a Western Union shop, then bought a one-third share in the business for $2,500. Gray & Barton quickly established a reputation for quality workmanship and by May 1870 relocated to larger facilities, a move that saved the company from the great Chicago fire of 1871, which devastated its former neighborhood and was halted a mere two blocks from its home. The destruction caused by the fire then resulted in even greater growth for Gray & Barton, as the company sold fire alarms, which were now in high demand, and also helped to rebuild the Western Union infrastructure in the city.

In 1872 Gray & Barton was consolidated with another Western Union shop in Ottawa, Illinois, a decision greatly influenced by Stager, who convinced Western Union’s president that Gray & Barton could supply all of the corporation’s telegraph needs. Thus, the company was renamed Western Electric Manufacturing Company, a firm so closely allied with Western Union that three of its five directors were Western Union executives. Moreover, Stager was named president, although it was Barton as secretary/treasurer who actually handled day-to-day affairs. Part-owner Gray held the title of company electrician and spent his days working on his inventions, becoming increasingly less involved in the operations of the shop, and eventually he sold his interest in Western Electric in 1875 and retired to pursue independent research and to teach at Oberlin College. In 1876 he filed a caveat with the U.S. Patent Office, announcing his intention to soon patent an invention that would transmit vocal sounds telegraphically. Only hours earlier, however, Alexander Graham Bell applied for a patent for the same idea, which became known as the telephone. As it turned out, what Bell actually patented would have never worked, while Gray’s idea would have. Western Union acquired both Gray’s and Edison’s telephone patents to challenge the American Bell Telephony Company (renamed AT&T in 1899), which led to a patent infringement suit and Bell ultimately being named the inventor of the telephone—and Gray being all but omitted from the history books.

Western Electric was caught in a difficult position over the telephone controversy because it manufactured instruments for both Bell and Western Union. After its defeat in court, Western Union dropped out of the telephone business, and in 1881 Bell bought a controlling interest in Western Electric and made it part of the Bell system, which had a number of companies spread across the country making telephones. To bring order to the situation Bell decided to assign its business to a single manufacturer, in the end selecting Western Electric, which by now had become the largest electrical manufacturer in the country, its growth aided by another major 19th-century invention, the electric light bulb. Thus, in 1882 Western Electric became Bell’s exclusive manufacturer of telephones.

Company Perspectives:

Graybar is the vital link in the supply chain, adding value with efficient and cost-effective service and solutions for our customers and our suppliers.

Formation of Graybar Electric: 1925

Stager served as president of Western Electric until shortly before his death in 1885, and Barton then served as president from 1886 to 1908. In 1894 Western Electric’s engineering department began to move away from invention, electing instead to improve upon the telephone in light of the impending expiration of Bell’s original patent. In 1907, however, the company returned to an emphasis on original research and development. In the early decades of the 20th century, Western Electric also became a major distributor of electrical equipment, offering items produced by a large number of outside companies. In 1925 AT&T decided to restructure Western Electric in order to have the company focus on serving the Bell system. The research division of the engineering department formed the basis of a new company, Bell Telephone Laboratories, which would become one of the world’s great research organizations. Western Electric’s supply division was also organized as a separate business called Graybar Electric Company, Inc., the name a tribute to Gray and Barton.

In 1928 Graybar moved its headquarters to the Graybar Building located at 420 Lexington Avenue in New York City. A year later Western Electric sold the business to Graybar employees for $3 million in cash and $6 million in preferred stock. Graybar employees would only be permitted to buy shares once every three years and could only sell within the company. Almost immediately the company faced difficulties when the stock market crashed in October 1929, ushering in the Great Depression of the 1930s. To make it through these difficult years the company even sold appliances and sewing machines under the Graybar label, but the business recovered enough that by 1941 it topped $100 million in annual revenues and boasted some 86 distribution centers. Also in that year, the company bought out Western Electric’s outstanding shares for $1 million.

Graybar played a key role during World War II, serving as a conduit between private industry and the military. Defense-related business continued in the postwar years, with Graybar again aiding the military during the subsequent conflicts in Korea and Vietnam. Overall the company enjoyed strong growth in the years following World War II, its momentum not checked until the recession of the mid-1970s, which led to Graybar slashing its workforce by 20 percent. As a result, when economic conditions improved in the 1980s Graybar was unable to gear up quickly enough to meet the rising demand for electrical products. (In the meantime, in 1982, the company moved its headquarters to Clayton, Missouri.) It modernized its infrastructure, implementing one of the first computer-to-computer ordering systems, but a weak real estate market and slowdown in construction began to take its toll on the bottom line. Revenues, which had approached $1.5 billion in 1980, improved to just $1.89 billion in 1990, then fell to $1.74 billion in 1991, prompting the closure of some regional offices and another reduction in the workforce. Aside from a weak economy, it was also becoming clear to management that Graybar suffered from internal problems; the company was losing market share on its traditional electrical business while unable to make desired progress on the newer communications/data products.

Business improved as the economy recovered in the early 1990s. Despite sales growing to $2.3 billion in 1994, management decided to realign the business starting in January 1995, forming two business groups, one for electrical supplies and another devoted to the increasingly important comm/data business. That same year, Graybar formed the Solutions Providers Alliance, teaming up with wholesale distributors Kaman Industrial Technologies, WWR Scientific Products, and Vallen Corporation. To accommodate an aggressive new growth strategy, Graybar added 45 locations, 2,400 employees, and 350 salespeople from 1994 to 1999. It also improved its network of warehouses, spending $144 million to construct 16 major new facilities that dramatically cut down on delivery time. As a result of these investments, the company was well positioned to take advantage of a strong economy in the final years of the 1990s. In 1999 annual revenues topped $4.2 billion, while profits almost doubled during this period, improving from $36 million in 1995 to $64 million in 1999. The improvement in the comm/data sector was of particular importance. In 1991 it accounted for just 17 percent of Graybar sales, but by 1999 totaled 38 percent.

Graybar engaged in some external growth, making several acquisitions in 1999 and 2000, the largest being Splane Electric Supply Co., a Detroit, Michigan, company with $30 million in annual sales, 70 employees, and six locations. In 2000 Graybar revenues improved to $5.2 billion, while net income topped $66.2 million. To support further expansion of its nationwide distribution centers, instrumental to the company’s growth, Graybar placed a $100 million bond offering in the summer of 2001, the largest financing effort in its history. By now, nine of the 16 distribution centers started in 1997 were operational and the remaining seven were only months away from opening. Once the system was in place, Gray was able to achieve its long-term aim of being able to ship to customers within 24 hours throughout the United States.

A downturn in the economy, however, soon hurt business and forced management to fine tune the company’s strategy. In 2001 revenues fell to $4.8 billion and business continued to drop off in 2002. As it had done in the early 1990s, Graybar opted to invest in its infrastructure in order to be ready to take advantage of the economy when it ultimately rebounded. The company invested $90 million on new technology to provide customers with more detailed information on orders, deliveries, and payments. At the same time, it encouraged its 4,100 suppliers to implement a standardized bar code system to create an open, central database similar to that found in the retail industry. In this way, Graybar would distinguish itself from its rivals, graduating from the role of middleman to a supply chain expert capable of adding value to the process. Once the new system was functional, Graybar would be able to sell detailed reports to both suppliers and customers. Because such tight inventory control was absent in a far-flung, loosely arranged network of electrical parts distributors who served countless contractors, mom-and-pop operations, as well as major construction firms, Graybar looked to gain an even greater share of a $73 billion, albeit low margin, industry. With the top three of some 4,200 distributors accounting for just 16 percent of market share, Graybar held great promise for long-term growth.

Key Dates:

1872:: Western Electric Manufacturing Company, a firm closely allied with Western Union, is formed.
1926:: Graybar Electric Company is created out of Western Electric’s supply department.
1929:: Employees acquire Graybar for $3 million in cash and $6 million in stock.
1941:: Employees buy back last of Western Union stock.
1982:: Headquarters moves from New York City to suburban St. Louis.
2001:: Company places $100 million in bonds, the largest financing effort in its history.